Regulatory FAQs

This type of administrative procedure will either be explicitly stated in the trust provisions of the document or it will be addressed in separate administrative procedures adopted by the two named trustees.

ERISA section 412 and related regulations (29 C.F.R. § 2550.412-1 and 29 C.F.R. Part 2580) generally require that every fiduciary of an employee benefit plan and every person who handles funds or other property of such a plan shall be bonded. ERISA’s bonding requirements are intended to protect employee benefit plans from risk of loss due to fraud or dishonesty on the part of persons who “handle” plan funds or other property. ERISA refers to persons who handle funds or other property of an employee benefit plan as “plan officials.” A plan official must be bonded for at least 10% of the amount of funds he or she handles, subject to a minimum bond amount of $1,000 per plan with respect to which the plan official has handling functions. In most instances, the maximum bond amount that can be required under ERISA with respect to any one plan official is $500,000 per plan. Effective for plan years beginning on or after January 1, 2008, however, the maximum required bond amount is $1,000,000 for plan officials of plans that hold employer securities.

All participant communications provided to participants must be continued until a participant is formally paid out from the plan and there is no longer an account balance maintained. Terminated employees can increase the cost of maintaining a plan. This is especially true if the company is paying any service providers on a per participant basis. Other considerations:

IRS reporting requirements − Participants who still have money in the Plan at the end of the year after the year in which they terminate employment must be reported on Form 8955-SSA, which goes to the Social Security Administration (SSA). Then, when the employee does finally make a complete withdrawal of funds, he should be reported again on Form 8955-SSA to remove his plan information from the Social Security files.

Time spent researching the whereabouts of a "lost" participant − You should be mailing various participant communications to former employees at least annually. Often, the longer an employee is gone, the greater the likelihood that you will lose track of his current whereabouts. Finding a missing participant can be very time consuming, and may involve using the IRS locator service, contacting beneficiaries or family members (if known), or searching social networking sites. Time spent researching the current address of a former employee is time that could have been spent elsewhere.

Qualified plan audit by an independent public accountant − Former employees with money in the plan count as plan participants on the Form 5500 and are included when determining if the plan is a “large” plan (greater than 100 participants). Large plans are subject to an annual independent audit, which costs thousands of dollars each year to complete. If the number of plan participants is approaching the large-plan size, terminated employees who still have money in the plan may put your headcount over the 100 participant level and force you to start having an annual audit performed.

Qualified Domestic Relations Orders, required minimum distributions at age 70½, and death benefits − These are situations that may arise over time which will require research and special handling. Obviously, the longer an ex-employee keeps his money in the plan, the greater the chance that some of these special situations will need to be addressed.

Under some plans, there is a waiting period before a terminated employee can request a distribution, but in general most plans allow employees to take their money out of the plan soon after termination. During the exit interview, the company’s representative will offer information on distribution options and may even provide the distribution paperwork. What should the employer do next?

Keep a list of former employees who still have money in the plan and follow up with them regularly.

Understand whether the plan allows or requires a “force out” distribution under certain conditions (typically when the employee’s balance is under $5,000) and if so, develop and follow procedures to force distributions on terminated employees who are under the threshold.

Maintain and periodically request updates for beneficiary and address information.

Take the opportunity to remind former employees about distribution options when mailing the Summary Annual Report. If correspondence mailed to a former employee comes back as undeliverable, know what options exist to locate him or her.

Understand the reporting requirements of Form 8955-SSA, and use the list of former employees to help stay on track with reporting both the former employees who still have money in the plan, as well as the ones who have withdrawn their funds and closed their accounts.

And remember, just because you have signed off on distribution paperwork, you cannot assume you are finished. When a cash distribution is mailed in the form of a check, there is the risk the check will not be cashed. It will be up to you to follow up, before you lose track of the participant. Do your best to encourage employees to take a rollover or withdraw their funds as soon as allowed upon termination of employment − this is the least complicated means of keeping down the costs associated with former employees in your retirement plan.

The Nationwide Group Retirement Series includes unregistered group fixed and variable annuities and trust programs. The unregistered group fixed and variable annuities are issued by Nationwide Life Insurance Company. Trust programs and trust services are offered by Nationwide Trust Company, FSB, a division of Nationwide Bank. Nationwide Investment Services Corporation, member FINRA. In MI only: Nationwide Investment Svcs. Corporation. Nationwide Mutual Insurance Company and Affiliated Companies, Home Office: Columbus, OH 43215-2220.

Generally speaking, no. However, a special grandfather rule may apply; see discussion below.

The Tax Reform Act of 1986 modified Internal Revenue Code (“Code”) Section 72(e) as it applies to distributions before the annuity starting date ("nonannuity distributions") from trusts and contracts that are described in Code Section 72(e)(5)(D) (qualified retirement plans, other than individual retirement accounts and annuities) by providing that such distributions shall be included in gross income except to the extent they are allocable to the taxpayer's investment in the trust or contract. Thus, for each nonperiodic payment received, a pro-rata taxation mechanism is established. [See Code Sections 72(e)(5)(D) and 72(e)(8)(B)]

The nontaxable portion of the withdrawal is the ratio of the amount of after-tax contributions to the total amount in the participant's account. This ratio is deemed the exclusion ratio. Assume that an employee has made total after-tax contributions of $10,000 to a thrift plan qualified under Code Section 401(a). At the date of valuation, further assume that the employee's account is valued at $50,000. Thus, the exclusion ratio is equal to 20%; i.e., $10,000 (total amount of after-tax contributions) divided by $50,000 (value of the employee's account on the date of valuation). If the affected participant makes a withdrawal of $25,000 from his or her account, $5,000 (20% of $25,000) would be income-tax free and the remaining $20,000 of the amount withdrawn would constitute taxable income. Assuming that the participant is over the age of 59½, there would be no premature distribution penalty tax under Code Section 72(t) applied to the taxable portion of the amount withdrawn.

A grandfather rule is available for certain after-tax contributions made prior to 1987. If a plan, which as of May 5, 1986, permitted the withdrawal of after-tax contributions, any after-tax contributions attributed to the period before 1987 may be withdrawn tax-free up to the total amount contributed as of the end of 1986 [See Code Section 72(e)(8)(D)]. If a participant has made pre-1987 and post-1986 after-tax contributions to a plan that as of May 5, 1986, permitted in-service withdrawals, any withdrawals exceeding the total amount of pre-1987 after-tax contributions will be treated in the pro-rata manner described above.

Benefits, including pension benefits, for unionized employees are established by the terms of the applicable collective bargaining agreement that is in place. The only way that an employer could convince the union employees to "opt-out" of their pension and accept a 401(k) plan in its place would be to open up the collective bargaining agreement and renegotiate the benefit package. Unions are generally averse to doing this unless the employer offers some significant enhancements to the package.

It is technically possible for an employer to maintain separate plans, whether they are 401(k) or pension for union and non-union employees. As long as the plan for the union employees was the subject of collective bargaining, any employee participating in the union plan can be excluded from the other plan.

Each plan, union and non-union, may maintain a separate and distinct benefit structure.

The question does not provide sufficient background to support an answer without first specifying some assumptions. For purposes of this answer, we are assuming that the questioner wants to know whether an investment product that is included as part of a qualified default investment alternative (“QDIA”) investment package has to provide a guaranteed interest rate of greater than zero (0). A QDIA is an investment into which a participant’s deferrals are defaulted in the absence of specific investment instructions on the part of the participant.

Permissible types of investment products that may be used as QDIAs include: (i) an investment fund product or model that provides varying degrees of long-term appreciation and capital preservation through a mix of equity and fixed income exposures based on the participant's age, target retirement date or life expectancy, i.e., a life-cycle or targeted-retirement-date fund; (ii) an investment fund product or portfolio that provides long-term appreciation and capital preservation through a mix of equity and fixed income exposures consistent with a target level of risk appropriate for participants of the plan as a whole, i.e., a balanced fund; or (iii) an investment management service under which a fiduciary allocates the assets of a participant's individual account to achieve varying degrees of long-term appreciation and capital preservation through a mix of equity and fixed income exposures, offered through investment alternatives available under the plan, based on the participant's age, target retirement date or life expectancy, i.e., a managed account. Investment funds or products with zero fixed income (or zero equity) do not qualify.

Assuming that the terms of the plan permit, and that there has been a distributable event under the plan, the following options may be available:

The participant could request and receive a distribution of the policy from the plan. In 2005, the IRS amended regulations promulgated under Code Sections 79, 83, and 402(a), to address distributions of life insurance and related products from qualified plans. These regulations provide that if a qualified plan transfers property to a plan participant in exchange for consideration that is less than the fair market value of the property, the transfer will be treated as a distribution by the plan to the participant to the extent the fair market value of the distributed property exceeds the amount received in exchange. For federal income tax purposes, the participant would include in income the cash surrender value of the policy distributed less any annual renewable term costs. These costs are one-year term premiums that are treated as taxable distributions and are reported annual on Forms 1099-R. The participant receives basis or credit for amounts previously subject to taxation to ensure that such amounts are not subject to taxation again.

Federal taxation could be avoided if the participant converted the policy into an annuity without a life insurance element, or directly rolled the policy over into a new employer’s plan. The latter option would be available if the new employer offered life insurance as an investment option under the plan and the requirements of Department of Labor Prohibited Transaction Exemption 92-6 were satisfied.

The trustee could cash in the policy and distribute the proceeds of the policy to the participant. The participant would be subject to federal income tax on the cash surrender value of the policy without regard to term insurance costs. In that regard, the distribution is taxed in the same manner as any other distribution from the plan.

Generally speaking, contributions in a qualified plan are allocated to a participant's account by a formula based upon the participant's "compensation." The compensation must be clearly defined. Both defined contribution and defined benefit contribution limitations are based upon "compensation." Compensation is usually defined as wages, salaries, fees or other amounts received for personal services rendered. Consequently, no compensation to an eligible participant under a plan prohibits a contribution being made.

No, the provision of investment related services does not automatically make the broker a fiduciary under ERISA.

ERISA does not require that the fiduciary adviser 3(21) possess any specific qualifications to have status as a 3(21) fiduciary. That being said, in order to legally dispense investment advice, the adviser must possess the requisite qualifications under FINRA and/or state law. The proposed investment advice regulations state that a person who is a registered investment adviser can be an investment advice fiduciary by virtue of that status.

ERISA states that, in order to act as an investment manager under ERISA 3(38), the individual or entity must be a registered investment adviser under the Investment Advisers Act of 1940 or state law. Alternatively, a bank or insurance company may act in the capacity of investment manager.

Fiduciary status is determined by the presence of “written disclosure.” Disclosure alone will not be determinative of fiduciary status. Facts and circumstances of the functional status of the party are truly determinative.

Schedule A is required to be filed with Form 5500 if any benefits under a retirement plan are provided by an insurance company, insurance service or other similar organization. This includes investment contracts with insurance companies, such as guaranteed investment contracts and pooled separate accounts.

When there is life insurance in the retirement plan the Schedule A, should have #7d marked with the premium amount entered in line 9. Since the DOL took over the 5500's, it has been confirmed with the DOL that this is what they expect to see when there is life insurance in a qualified retirement plan, even though it’s a break from past practice.

For investment and annuity contract information, enter the current value of the plan’s interest at year-end in the contract reported on line 7, e.g., deposit administration (DA), immediate participation guarantee (IPG), or guaranteed investment contracts (GIC), on Line 4. However, contracts reported on line 7 need not be included on line 4 if (i) the Schedule A is filed for a defined benefit pension plan and the contract was entered into before March 20, 1992, or (ii) the Schedule A is filed for a defined contribution pension plan and the contract is a fully benefit-responsive contract, i.e., it provides a liquidity guarantee by a financially responsible third party of principal and previously accrued interest for liquidations, transfers, loans, or hardship withdrawals initiated by plan participants exercising their rights to withdraw, borrow, or transfer funds under the terms of a defined contribution plan that does not include substantial restrictions to participants’ access to plan funds.

It seems that EBSA could test operational compliance with the 408(b)(2) disclosure rules either by auditing the plan or by auditing the service provider. In its audits of retirement plans and service, the EBSA has a checklist that it follows. For a copy of the EBSA Enforcement Manual, go to: www.dol.gov/ebsa. On the right hand side of that page you will find a link to "ERISA Enforcement." Click on the link and you will be taken to the ERISA Enforcement Manual of the EBSA and you can review copies of the checklists that the EBSA examiners use.

The EBSA could also initiate an audit of either the plan or of the service provider based on either a complaint from a disgruntled employee or based on a tip from someone, such as a competitor of a service provider, if that competitor suspected the rules were not being followed by the affected service provider.

Federal laws are complex and subject to change. The information provided above is based on current interpretations of the law and is not guaranteed. Neither the Nationwide nor its representatives give legal or tax advice. Please consult your attorney or tax advisor for answers to specific questions.

The focus of an IRS audit is on the tax qualification aspects of the qualified retirement plan, as found in Section 401(a) of the Internal Revenue Code (IRC). The IRS has a program that allows plan sponsors to identify and correct operational errors for their qualified plans. The program is known as the Employee Plans Compliance Resolution System (EPCRS).

Any audit by the IRS tends to focus on:

The plan document provisions

The operational aspects of the plan

The demographic characteristics of the plan

A DOL audit focuses on the fiduciary and participant rights of the qualified plan’s operation. The Employee Benefits Security Administration (EBSA) division of the DOL conducts the audit of the plan. The ERISA Enforcement Manual contains a checklist for the examiner’s Report of Investigation (ROI), which includes the areas the examiner is to cover in an audit of a qualified retirement plan.

A DOL audit focuses on the fiduciary and participant rights of the qualified plan’s operation. The Employee Benefits Security Administration (EBSA) division of the DOL conducts the audit of the plan. The ERISA Enforcement Manual contains a checklist for the examiner’s Report of Investigation (ROI), which includes the areas the examiner is to cover in an audit of a qualified retirement plan.

There are three plan design options available to employers who want to both avoid having to perform the ADP nondiscrimination test and eliminate the need to refund salary deferral contributions to the HCE group of employees in the event that the ADP nondiscrimination test is failed:

Establish a qualified automatic contribution arrangement (“QACA”) as part of the 401(k) plan’s contribution structure.

SIMPLE 401(k) Plan. A SIMPLE 401(k) plan:

Provides a simplified way for small employers with 100 or fewer employees to offer retirement benefits to their employees.

Covers employees who received at least $5,000 in compensation for the preceding year.

Is not subject to the annual nondiscrimination tests that apply to traditional 401(k) plans.

Similar to a safe harbor 401(k) plan, the employer is required to make employer contributions that are fully vested. Employees covered by a SIMPLE 401(k) plan may not, however, receive any contributions or benefit accruals under any other retirement plans of the employer. Under a SIMPLE 401(k) plan, an employer is generally required to do one of the following:

Match the participant contributions dollar-for-dollar up to 3% of pay

Make a 2% nonelective contribution for each eligible employee. The employer's nonelective contributions must be made for each eligible employee regardless of whether the employee elects to make salary reduction contributions for the calendar year. The employer may, but is not required to, limit nonelective contributions to eligible employees who have at least $5,000 (or some lower amount selected by the employer) of compensation for the year. The employees are immediately 100% vested in any and all contributions.

Safe Harbor Contribution Formula. A safe harbor 401(k) plan:

Does not require an employer will no longer to perform nondiscrimination testing of elective contributions or matching contributions.

Under a safe harbor 401(k) plan, an employer can elect to provide either of the following contributions to its eligible nonhighly compensated employees (“NHCEs”):

A dollar-for-dollar match on elective contributions up to 3% of compensation and a 50 cents-on-the-dollar match on elective contributions between 3% and 5% of compensation (the basic matching formula);

A 3% of compensation nonelective contribution.

Qualified Automatic Contribution Arrangement (“QACA”). A 401(k) plan that includes a QACA:

Is not required to perform nondiscrimination testing of elective contributions or matching contributions.

Is an arrangement that treats an employee who fails to make an election to defer into the plan as having elected to defer a qualified percentage of his or her compensation into the plan until the employee affirmatively elects to not defer or to defer at a different percentage.

If a participant fails to make an election to defer compensation into the plan, the QACA must provide that no less than 3% of the participant's compensation must be deferred into the plan during the plan year in which the employee becomes a plan participant and the following plan year. After that plan year, the QACA must provide that the deferral percentage will increase by at least 1% each plan year thereafter until the participant's rate of deferral equals 6% of compensation.

Summary. The methods discussed above have advantages and disadvantages. Plan sponsors looking for the most cost-effective plan design, should work with a qualified retirement plan design specialist who can run the numbers under various scenarios.

Federal income tax laws are complex and subject to change. The information provided above is based on current interpretations of the law and is not guaranteed. Neither the company nor its representatives give legal or tax advice. Please consult your attorney or tax advisor for answers to specific questions.

The final rule changes the deadline for disclosures of all investment-related information to "at least annually." The interim regulation had previously required that such information be disclosed within 60 days. The deadline for disclosure of changes to other information that has been previously disclosed remains 60 days from the date a covered service provider (vendor) is informed of such change. See, Sec. 408(b)(2)(c)(1)(v)(B)(2).

Concerning Sec. 404(a)(5) participant disclosures the EBSA website at the Department of Labor provides: "The July 1 effective date of the final regulation relating to service provider disclosure under section 408(b)(2) will impact when disclosures must first be furnished under the final rule on fee disclosures for participants. The transitional rule for the final rule on fee disclosures for participants was revised in July 2011 so that the first disclosures would follow the effective date of the 408(b)(2) regulation. Consequently, for calendar year plans, the initial annual disclosure of "plan-level" and "investment-level" information (including associated fees and expenses) must be furnished no later than August 30, 2012 (i.e., 60 days after the 408(b)(2) regulation's July 1 effective date). The first quarterly statement must then be furnished no later than November 14, 2012 (i.e., 45 days after the end of the third quarter (July through September), during which initial disclosures were first required). This quarterly statement need only reflect the fees and expenses actually deducted from the participant or beneficiary's account during the July through September quarter to which the statement relates."The responsibility for disclosure is that of the plan's plan administrator delineated under the plan.

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